A

PROJECT REPORT
ON

“TO STUDY WORKING CAPITAL FINANCING BY BANK”

SAVITRIBAI PHULE PUNE UNIVERSITY

IN PARTIAL FULFILLMENT OF
BACHELOR IN BUSINESS ADMINISTRATION-(BBA)
SUBMITTED BY
MR. TEJAS SANJAY KANCHAR

THE GUIDENCE OF
PROF.P.R.GAIKWAD

AGASTI ARTS, COMMERCE AND DADASAHEB RUPWATE SCIENCE COLLEGE,

AKOLE
ACADEMIC YEAR - 2024-2025
 VIS HVAS CO-OP BANK NASHIK
“ ,

IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT OF

BACHLOR OF BUSINESS ADMINEST RATION

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 Im declare that the Project Report entitled
TO
completed and submitted by me to UNIVERSITY OF PUNE, for
the partial fulfillment of T.Y.B.B. A under the guidance of
is my original work and the conclusions drawn
there in are based on the material collected myself.

The project work was undertaken as a part of the academic curriculum

according to university rules

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 At the first instance I offer my sincere thanks to the director
who has introduce restructuring course and given me opportunity to
bring out this report.

I am Great full to our and thank him for valuable

assistance that he has given me without his co-operation. I would not have
been able to complete this project.

I am Indebted to the and project guide

under whom I Have collected my
Necessary data of my Project.

I wish to take this opportunity for expressing my grateful thanks to all

those who have been of valuable assistance to me in charring out research,
as well as writing this project for their kind co-operation and encouragement.

I once again thank them.

:
)

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 Certificate from collage guide
Acknowledgement
Declaration

1.1 Selection of topic

1.2 Objective of study
1.3 Research Methodology
1.4 Scope of the study

2.1
Introductionto Organization
2.2 History of organization

3.1 Introduction to Working Capital

3.2 Recommendation of various committee on working capital
finance
3.3 Calculation of working capital of bank

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INTRODUCTION

Topic selection is one of the most or one of the important aspects of out
project. As it decides the course of action, to be followed. The topic selected
should be such that it helps in understanding the Banking concepts clearly, as
was given the topic by the company itself.

The topic given by my project guide was “

This covers all the things related to the Working Capital Finance
provided by the banks.

The topic was to collect the financial information from the bank so as to
find out the working capital calculation process of the bank.

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 To collect the financial information from the bank so as to find out
calculation process of the bank.

1) To be able to apply the theoretical knowledge obtained at the institute

in practical manner in the actual business environment.

2) To get the knowledge about organization problems, perceptions and

challenges.

3) To interact with the managers of the company and gain knowledge

through their real life experience.

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 The data collected for the project was in the form of written as well as
verbal information information regarding the Working Capital Financing by
Bank.

The information about the bank is gathered from the discussion with
the employees/staff and from the website of the bank.

2
The secondary data collected-
st
Balance as on the date of 31 march of the 3 year 2014-15, 2015-16,
2016-17.
The profit & loss accounts for the year ending on
The details about organizational structure

The financial statements i.e. balance sheets and profit & loss
accounts were
Obtained from accounts department.
Loan department supplied the loan procedures and details.
The information regarding organization structure and services provided

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by the
Bank was given Branch Manager.

The project relates to the financing of working capital by banks. An

attempt has been made to analyze the procedures which the banks follow
finance to industrial units to fulfill their working capital requirements, by
utilizing the information provided by the loans section of the bank.

The project extends to the study of the criteria on the basis of which
banks provide finance, the methods of computation of the permissible bank

finance.

A major part of working capital loans is provided by the commercial banks.

Industries depend upon the banks as a primary source of working capital
finance.

Over the past several years, banks have become the most reliable source
of institutional credit. Banks provide short-term finance to industries in the form
of working capital. Hence, working capital financing by banks is a subject worth
studying.

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 Vishwas Co-op Bank began in a small way, has now grown up to one of
the leading and respectable banks not only in Nashik but also in Maharashtra.
Area of Operation of the bank is Nashik, Thane, Dhule, Aurangabad, Jalgaon,
Ahmad Nagar, Mumbai and Pune. At present the bank has five branches and
Head Office. Looking at the performance and achievements of the Bank, RBI
has granted the special permission to Vishwas Co-op Bank for opening a
branch in Mumbai.
Since the establishment, the bank is making a steady progress and
continuously maintaining “A” audit classification. Vishwas Co-op Bank is the
first bank to provide 16 hours Customer service i.e. Morning 8 A.M. to
Mid night 11 O,clock. The Management Information System designed by bank
has been made applicable to all the urban Co-op Banks in Maharashtra. The
loan application forms designed by the bank are reckoned as a model
loan application form and have been followed by many urban co-op
banks in Maharashtra. On 6th February 2003, Vishwas Co-op Bank has
been awarded the “Jagtik Marathi Chamber of Commerce and
Industries” for its best performance in the co-operative banking sector at
the national level, in the presence of Hon. Chief Minister of Maharashtra
Shri. Sushilkumarji Shinde, Hon. Speaker of Loksabha Shri. Manohar Joshi,
Hon. Governer of RBI Dr. Bimal Jalan and Executive Director of RBI Hon.
Dr. Narendra Jadhav. Three of the six recommendations given by the Hon.
Chairman of Vishwas Co-op Bank for smooth working of the Urban Co-op
Banks are accepted by the honorable governor. The good work done by the
bank is also appreciated by “Sahakar
Bharati”, Mumbai by presenting an award of the “Best Bank” for the year
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 -

Whenever one thinks about a bank, which is for the people, by the
people, it is none other than Vishwas Co-op bank. Intodays highly competitive
and market driven economy, the common man's basic need is nothing but
“Financial Need” . A Common man always finds it difficult to get loans of
small amount. Taking into consideration, the problems faced by common
man, Hon. Chairman Shri. Vishwas Thakur at the age of 27 alongwith
his associate members founded the Vishwas Co-op Bank. The proposal for
the formation of a bank was prepared under the guidelines of District
Deputy Register Hon. Shri. Manohar Tribhuvan and Taluka Deputy
Register Hon Shri Vijay
Suryanwanshi.
On 8th of October 1996, Co-operative department of Maharashtra State
issued the necessary license. On 25th March 1997, Vishwas Co-op Bank came
into existence. Vishwas Co-op Bank, which began in small humble way, has
now grown up to one of the leading banks in Nashik and even in Maharashtra.
Vishwas Co-op banks style of work is Dynamic. The approach of the bank in
every aspect is very positive and innovative. Introduction and implementation
of “Management Information System” and business development plan are the
significant features of the bank, which has been appreciated by the Co-op
department.
Vishwas Co-op Bank has already started working on the interactive
website where the customer can download Current, Savings and FD froms. He
will also get the information on his account details through website. The
customer will have only read only access. The staff will communicate each
other through mail, which will make the communication more easier and
faster. Vishwas Co-op Bank is also planning to go for Core Banking Solutions

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in near future, which will make Banking operations more customer friendly.
Customer will avail the facility of anytime anywhere banking. The entire
banking operation will become centralised. The Customer will withdraw as
well as deposit the money from any branch. The staff will be in position to
give better customer service due to this automation process.

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 The working capital management refers to management of the working
capital, or to be more precise, the management of current assets .A firm
working capital consists of its investment in current assets which include short
term assets such as cash and bank balance, inventories, receivables (including
debtors and bills),and marketable securities. Working capital management
refers to the management of the level of all these individual currents assets.
The need for working capital management arises from two considerations. First,
existence of working capital is imperative in any firm. The fixed assets which
usually require a large chunk of total funds, can be used at an optimum level
only if supported by sufficient working capital, and second, the working capital
involves investment of funds of the firm. If the working capital level is not
properly maintained and managed, then it may result in unnecessary blocking
of scarce resources of the firm. The insufficient working capital, on the other
hand, put different hindrances in smooth working of the firm. Therefore, the
working capital management needs attention of all the financial managers.

The working capital management includes the management of the level of

individual currents assets as well as the management of total working capital.
However, each individual current assets has unique characteristics which the
financial manager must consider in deciding how much money should be

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invested in each of these current assets i.e., cash and bank balance, marketable
securities, receivables and inventories has been taken up in subsequent
chapters. However, the general principles of working capital management have
been taken up in this chapter.

The term of working capital refers to current assets which may be

defined as (i) those are convertible into cash or equivalents fixed assets as well
as the current assets, both requires investment of funds. So, the management
of working capital and of fixed assets, apparently seem to involve same types
of considerations but it is not so. The management of working capital involves
different concepts and methodology than the techniques used in fixed assets
management. The reason for this difference is obvious. The very basis of fixed
assets decision process and the working capital decision process are different.
The fixed assets involve long period perspective and therefore, the concept of
time value of money is applied in order to discount the future cash flows;
whereas in working capital the time horizon is limited, in general to one year
only and the time value of money concept is not considered. The fixed assets
affect the long term profitability of the firm while the current assets affect the
short liquidity position.

i The gross working capital refers to the firm’s

investment in all the current assets taken together. The total of investments in
all the individual current assets is the gross working capital. This concept
implies the total of all current assets of a business firm. A current asset is that
which can be converted into cash within an according year or an operating cycle.
The current assets include cash and bank balance, debtors, bills receivables,

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inventories, expenses prepaid and short-term investments.

ii) This concept of working capital is the difference

between current assets and current liabilities. While current assets have been
defined above, current liabilities can be explained as those liabilities which are
expected to mature for payment within an accounting year and include creditors,
bills payable, outstanding expenses, bank overdraft and short-term loans.

The net working capital may either be positive or negative. If the total
current assets are more than total current liabilities, then the difference is
known as positive net working capital, otherwise the difference is known as
negative networking capital.

Both concepts of working capital (gross working capital & net working
capital) have their own relevance and a financial manager should give due
attention to both of these. The cash inflows and outflows for any firm are
seldom synchronized and so, some working capital is necessary. The cash
outflows occurring from the existence of current liabilities are more easily and
correctly predictable but the cash flows from current assets are difficult to be
accurately predicted. The more predictable, these cash flows are, the less the
networking capital required by the firm. The firm with more and more uncertain
cash inflows must maintain higher level of current assets adequate to cover the
current liabilities.

The working capital can also be divided into categories: i) fixed working
capital and ii) fluctuating working capital.

Every business requires some minimum amount of working capital inspite

of the level of operations, throughout the year. This amount represents the
fixed
amount of working capital.

In many business firms, the levels of operations fluctuate from time to

time depending upon the demand pattern. In case, the demand periods, the
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need for working capital also capital also increases and during low demand
periods, the for working capital also comes down. This aspect of working
capital can be shown in a better way with the help of following diagram.

The fixed amount of working capital also go on increasing as the time

passed because of the growth of the firm. This can be shown in the following
diagram.

The working capital needs of a firm are determined and influenced by

various factors. A wide variety of considerations may affect the quantum of
working capital required and these considerations may vary from time to time.
The working capital needed at one point of time may not be good enough for
some other situation. The determination of working capital requirement is a
continuous process and must be undertaken on a regular bas9s in the light of
the changing situations. Following are some of the factors which are relevant in
determining the working capital needs of the firm
In some business organizations, the sales are
mostly on cash basis and the operating cycle is also very short. In these
concerns, the working capital requirement is comparatively less. Mostly
service giving companies come in this category. In such cases, the working
capital requirement is more.
Working capital requirements also fluctuate according to
the production policy. Some products have a seasonal demand but in order to
eliminate the fluctuations in working capital, the manufacturer plans the
production in a steady flow throughout the year. This policy will even out the

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 fluctuations in working capital.
Due to competition in the market, the demands for
working capital fluctuate. In a competitive environment, a business firm has to
give liberal credit to customers. Similarly, it will have to maintain a large
inventory of finished goods to service the customers promptly. In this
situation, larger amount of working capital will be required.
On other hand, when a firm is in seller’s market, it can manage with a
smaller amount of working capital because sales can be made on cash basis
and there will be no need to maintain large inventory of finished goods
because customers can be serviced with delay.
A firm which is producing products with seasonal
demands, requires more working capital during peak seasons while the
demand for working capital will go down during slack seasons.
The working capital needs of the firm
increase as it grows in terms of sales or fixed assets. A growing firm may
need to invest funds in fixed assets in order to sustain its growth production
and sales. This will in turn increase investments in current assets which will
result in increase in working capital needs.
: The operating efficiency of the firm relates to the
optimum utilization of resources at minimum cost. The firm will be effectively
contributing to its working capital if it is efficient in controlling operating costs.
The working capital is better utilized and cash cycle is reduced which capital
needs.

The working capital requirements of a firm depend to a great

extent on the credit policy followed by a firm for its debtors. A liberal credit
policy followed by a firm will result in huge funds blocked in debtors which will
enhance the need for working capital. The situation will be further deteriorated
if the collection procedure is also slack. If a liberal credit policy is followed
without inquiring into the credit worthiness of customers there can be a
problem of recovery in future which will further push up the working capital
requirements.
The need for working capital is also affected by the credit policy

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 followed by the firm’s creditors. If the creditors are ready to supply materials
and goods on liberal credit, working capital requirements are substantially
reduced. On the other hand, if purchases are mainly for cash, working capital
needs go up. While planning the working capital, due attention should be given
towards the credit policies followed by the firm and its creditors.

As the sales grow, the working capital needs also go up.

Actually it is very difficult to establish an exact proportion of increase in
current assets, as a results of increase in sales. Advance planning of working
capital becomes essential because current assets will have to be employed
even before growth in sales takes place. Once sales start increasing, they
must be sustained. For this a firm will have to expand its production facilities
which will require more investments in fixed assets. This will in turn result in
more requirements of current assets which will increase working capital
needs.

a company has to pay dividends in cash as per company act

1956. if a liberal policy is followed for payment of dividends, more working
capital will be required. The needs for working capital will be substantially
reduced if dividend policy is conservative.

Bank credit is the primary institutional source of working capital finance in

India. In fact, it represents the most important source for financing of current
assets.

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 Under cash credit/overdraft form/ arrangement of bank finance, the
bank specifies a predetermined borrowing/credit limit. The borrower can
draw/ borrow up to the stipulated credit/overdraft limit. Within the
specified limit, any numbers of drawls /drawings are possible to the extent
of his requirement periodically. Similarly, repayment can be made
whenever desired during the period. The interest is determined on the
basis of the running balance/amount actually utilized by the borrower and
not on the sanctioned limit. However, a minimum(commitment) chare may
be payable on the unutilized balance irrespective of the level of borrowing
for availing of the facility. This form of bank financing of working capital is
highly attractive to the borrowers because, firstly, it is flexible in that
although borrowed funds are repayable on demand, banks usually do not
recall cash advances/roll them over and, secondly, the borrower has the
freedom to draw the amount in advance as and when required while the
interest liability is only on the amount actually outstanding. However, cash
credit/overdraft is inconvenient to the hampers credit planning. It was the
most popular method of bank financing of working capital in India till the
early nineties. With the emergence of new banking since the mid-nineties,
cash credit cannot at present exceed 20% of the maximum permissible
bank finance (MPBF) / credit limit to any borrower.

Under this arrangement, the entire amount of borrowing is credited to

the current account of the borrower or released in cash. The borrower has
to pay interest on the total amount. The loans are payable on demand or in
periodic installments. They can also be renewed from time to time. As a
form of financing, loans imply a financial discipline on the part of the
borrowers. Form a modest beginning in the early nineties, at least 8 0 %
of
MPBF/CREDIT limit must now be in the form of loans in India.

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 This arrangement is of relatively recent origin in India. With the
introduction of the new bill market scheme in 1970 by the reserve bank of
India(RBI), bank credit is being made available through discounting of
usance bills by banks. The RBI envisaged the progressive use of bills as an
instrument of credit as against the prevailing practice of using the widely-
prevalent cash credit arrangement for financing working capital. The cash
credit arrangement gave rise to unhealthy practices. As the availability of
bank credit was unrelated to production needs, borrowers enjoyed
facilities in excess their legitimate needs. Moreover, it led to double
financing. This was possible because credit was done, for example, by
buying goods on credit from suppliers and raising cash credit by
hypothecating the same goods. The bill financing is intended to link credit
with the sale and purchase of goods and, thus, eliminate the scope for
misuse or diversion of credit to other purposes.

Under this arrangement, banks advance loans for 3 - 7 years

repayable in yearly or half-yearly installments.

While the other forms of bank credit are direct forms of financing
in which banks provide funds as well as bear risk, letter of credit is an
indirect form of working capital financing an banks assume only the risk,
the credit being provided by the supplier himself.
The purchaser of goods on credit obtains a letter of credit from a
bank. The bank undertakes the responsibility to make payment to the
supplier in case the buyer fails to meet his obligations. Thus, the modus
operandi of letter of credit is that the supplier sells goods on credit/
extends credit (finance) to the purchaser, the bank gives a guarantee and
bears risk only in case of default by the purchaser.

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 Banks do not provide working capital finance without obtaining
adequate security. The following securities are the most important
modes of security required by bank-

Under this mode of security, the banks provide credit to borrowers

against the security of movable property, usually inventory of goods. The
goods hypothecated, however, continue to be in the possession of the
owner of these goods (i.e., the borrower). The rights of the lending bank
(hypothecate) depend upon the terms of the contract between the
borrower and lender. Although the bank does not have physical
possession of the goods, it has the legal right to sell the goods to realize
the outstanding loan. Hypothecation facility is normally not available to
new borrower.

Pledge, as a mode of security, is different from hypothecation in

that in the former, unlike in the goods which are offered as security are
transferred to the physical possession of the lender. An essential
prerequisite of pledge therefore is that the goods are in the custody of the
bank. The borrower, who offers the security, is called a ‘pawnor, (pledgor),
while the bank is called ‘pawnee, (pledgee). The lodging of the goods by
the pledgor to the pledge is a kind of bailment. Therefore, pledge creates
some liabilities for the bank. It must take reasonable care of goods
pledged with it. The term ‘reasonable care, means car, which a prudent
person would take to protect his property. He would be responsible for any
loss or damage if he uses the pledged goods for his own purposes. In
case of non-payment of the loans, the bank enjoys the right to sell the
goods.

The term lien refers to the right of a party to retain goods belonging

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 to another party until a debt due to him is paid. Lien can be of two types - I)
particular lien , & II) general lien. Particular lien is right to retain
goods until a claim pertaining to these goods is fully paid. On the other
hand, general lien can be applied till all dues of the claimant are paid.
Banks usually enjoy general lien.

It is the transfer of a legal/ equitable interest in specific immovable

property for securing the payment of debt. The person who parts with the
interest in the property is called ‘mortgagor, and the bank in whose favour
the transfer takes place is the ‘mortgagee,. The instrument of transfer is
called the ‘mortgage deed,. Mortgage is, thus, conveyance of interest in
the mortgaged property. The mortgage interest in the property is
terminated as soon as the debt is paid. Mortgages are taken as an
additional security for working capital credit by banks.

. Under this method for working capital purposes for borrowers

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 requiring fund-based limits upto Rs.5 crore SSI borrowers and
Rs.2 crore in case of other borrowers, may be assessed at
th
minimum of 2 5 % of the projected annual turnover of which 1 1 5
should be provided by the borrower (i.e. minimum margin of 5%
of the annual turnover to be provided by the borrower) and the
th
balance 4/5 (i.e. 20% of the annual turnover) can be extended
by way working capital finance.

. The projected turnover/output may be interpreted as projected

“gross sales “which will include excise duty also.

. Since the bank finance is only intended to support need-based

requirement of a borrower, if the available NWC (net long term
surplus funds) is more than 5% of the turnover the former
should be reckoned for assessing the extent of bank finance.

. Assessment of working capital limits in respect of borrowers

not eligible to provided fund based working capital limits under
‘simplified turnover method, is to be done as per MPBF system
‘second method of lending,, except in case of tea and sugar
industry where credit requirement is assessed as per cash
budget system.

. Under this method, for assessment of borrowers WC needs, the

projections submitted by the borrower in the various forms
mentioned that the following year is relevant. The first step in
assessing the quantum of WC finance is to find out whether the
projections given by the borrower are reasonable. Any optimism
or pessimism in accepting projections is neither desirable for
the bank nor for the borrower as it may lead to over-financing or
under-financing.

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 . To assess the reasonableness of borrower’s projections, the
following factors should be kept in view;

a) The branches can use with advantage the past data given by the
borrower as well as the data available with it. The comparison has to be made
between the past performance and the future projections. If the future
projections are markedly different form the past trend in relation to projected
rate of growth, the reasons for the same have to be ascertained before
accepting the various projections.

b) The projections given by the borrower are normally based on certain

assumptions such as market demand, cost of raw materials, price, availability
of inputs and other environmental factor. The bank has to assess how far
these assumptions are realistic and materialize.

c) How limits already sanctioned by the bank have been utilized by the
borrower in the past? Has the conduct of the account been as per terms of
sanction or these have been frequently violated.

d) Critical analysis of sales projections – the most important area to be

looked into is sales. All other aspects are directly related to the projected level
of sales. Therefore, determining the projected level of sales is the first step in
assessing the working capital needs of a borrower. Once the level of sales
has been determined in relation to sales. The projected level of sales depends
upon:

. What is the installed and licensed capacity? Does it have any idle
capacity, which can now be utilized?

. Are essential inputs available to take care of projected production

figures?
. What are the present market conditions and terms of sales? What plans

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 are there to boost sales?

. What is the position of order book/orders in hand?

. From what sources increase in NWC will be met?

. Is the unit proposing to tap the export potentials/ markets? What are the
prospects for exports?

. How the increase in production is going to affect the quality and cost of
production?

. Is the unit undertaking any expansion, modernization or diversification

programme?

A higher than normal sales estimate for the following year can be accepted
only after the bank is satisfied on the basis of the above scrutiny that the
projected level of sales can be achieved and the available past data and future
plans give positive indications in this regards. The bank has also to ensure
that borrower is whiling to create the necessary support to achieve the sales
target.

The branches, having satisfied itself as to the projected level of sales,

can determine
the other data in relation to sales. The following steps can be taken for
finalizing other data:

. The relationship between different items constituting cost of production

can be studies in relation to sales and cost of sales. It is to be ensured
that the projected increase in respect of any items is not out of
proportion to the past relationship. Valuation of various items should be
based on current cost.

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 . After finalizing the above-mentioned projections, the holding period of
current assets is to be determined. The holding period of chargeable
current assets can be determined based on the rule that the projected
holding should be preferably lower of norms or past practice.

. The levels of other current assets can also be estimated on the basis the
borrower’s past practice.

. The projected level of NWC should at least be 25% of total current assets
under second method of lending.

. The bank is to bridge the gap between current assets and current
liabilities after ensuring the borrower’s contribution. Therefore, the
quantum of bank finance is very much dependent upon availability of
short-term credit from other sources i.e. other current liabilities is
projected properly.

In case of tea and sugar industries of finance may be at the peak during
certain months while the sale proceeds may be realized throughout the year
to repay the outstanding in the account. Therefore, credit limits are fixed on
the basis of projected monthly cash budgets to be received before beginning
of the season. Branches should follow the procedure/guidelines issued form
time to time through various circulars for financing tea and sugar industries.

. After arriving at the MPBF on the basis of inventory and receivable

norms and appropriate method of lending, the various fund based & non-
fund based limits and sub-limits have to be decided. The fund based
limits should not exceed the MPBF.

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 . The bulk of the inventory limits are set up generally in the shape of cash
credit, the receivable limits may be either by way of C/C against hook
debts or by way of bills limit. Within the sanctioned limit, drawing power
may be allowed on the basis of monthly stock statements, depending
upon the regularity and reliability and to ensure there is no double
financing.

. In addition to the fund-based limits, non-fund based limits like inland

&foreign L/C, guarantees and acceptances are given keeping in view the
needs as well as the capacity of the borrower.

In order to bring out an element of discipline in the utilization of bank credit

and gain better control over flow, a “loan system for delivery of bank credit”
was introduced by RBI. The said system has been extended in phased manner
to cover larger number of borrowers.

. Loan component and cash credit component.

. Under this system, after the assessment of MPBF of a borrower,
working capital requirements are bifurcated into ‘loan
component’, termed as Working Capital Demand Loan (WCDL)
and ‘cash credit (cc) component’ . Normally, borrowers
are expected to avail the ‘loan component’ only after having
fully availed/utilized the prescribed percentage of CC
component of MPBF. However, if a borrower desires to
draw the ‘loan
component’ first, the same can be agreed to.
. The extant guidelines for annual review of working capital limits
are invariably to be strictly observed even under the system of
loan delivery. As regards the guidelines relating to the cut off
point of the working capital limits above which loan delivery

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 system is applicable, the percentages of limits to be allowed as
WCDL and CC component, the repayment of WCDL, the
procedure for renewal/rollover of WCDL, incumbents should
follow the instructions advised through HO circulars form time
to time.
. The loan system would be applicable to borrower accounts

classified as ‘standard’ or ‘substandard’

. Adhoc credit limit for meeting temporary requirements should
be sanctioned only after the borrower has fully utilized the “cash
credit component” and the ‘loan component’ of the MPBF. In the
case of consortium, member banks are normally expected to
share the “cash credit component” and the “loan component”
on apro rata basis of their individual shares of MPBF.
. The bifurcation of the credit limit into ‘loan’ and ‘cash credit’
should be effected after excluding export credit limits (pre-
shipment and post-shipment).
. Bills limit for inland sales is to be fully carved out of the loan
component. Bills limit also includes limit for purchase of third
party ( outstation) cheques , banks drafts.
. Suitable clauses are to be incorporated in the loan document to
provide for a right to recall working capital credit facility
including the loan component.
. Exemption – at present sugar, tea fertilizer and information
technology & software industries are exempted form the
purview of loan system for delivery of bank credit.

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Regarding loan proposal

We refer to the captioned loan proposal recommended by you for

sanctioning/renewing advance facility the loan requested by the applicant. We
are pleased to inform you that, the board of directors in the meeting held on
. Have considered the proposal for sanction / renewal and
the
detailed of same as under:-

Mr. / Mrs.-----------

Limit requested-
Type
Limit sanctioned / renewed
Margin
Margin
Repayment holiday
Repayment in monthly installment
Rate of interest with monthly rests+ penal interest @ % to be charged on the
overdue amount on monthly basis.
Installment Rs-------per month
st
1 installment due
Security:-

Prime: ---------------------------------

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 Collateral: ------------------------------

Valuation amount Rs.------------------

A study group, popularly known as tandon committee, was

appointed by Reserve Bank Of India in July 1974, under the
chairmanship of shri. P.L.Tandon,to suggest guidelines for national
allocation and optimum use of bank credit. Tandon committee also
highlighted the weaknesses in the existing system of working capital
finance, as pointed out by the committee. The Tondon Committee
suggested that the borrower should be allowed to hold reasonable level of
current assets. Particularly in the case of inventories, the Tondon committee
suggested that the level of inventory should be as per the requirement only
and in any case excessive investments in the inventories should be avoided.
The banker should finance only those receivables which are in tune with the
practices of the borrower’s company and industry. In order to avoid
excessive investments in inventories, there is a need for having some
uniform norms. The Tondon Committee in its final report has suggested
norms for 15 industries. Industries like heavy engineering and sugar were
omitted.
The recommendations of the Tandon Committee are based on the
following notions

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 The borrower should indicate the likely demand for credit. For this
purpose, he should draw operating plans for the ensuing year and supply
them to the banker. This procedure will facilitate credit planning at the bnks
level. It will also help the bankers in evaluating the borrower’s credit needs
in
a realistic manner and in the periodic follow-up during the ensuing year.

The banker should finance only the genuine production needs of the
borrower. The borrower should maintain reasonable levels of inventory and
receivable; he should hold just enough to carry on his target production.
Efficient management of resources should therefore, be ensured to
eliminateslow moving and flabby inventories.

The working capital needs of the borrower cannot be entirely

financed by the banker. The banker will finance only a reasonable part of it;
for the remaining the borrower should depend upon his own funds,
generated internally and externally.

. The borrower should be allowed to hold only a reasonable level

of current assets, particularly inventory and receivables;

. The banker should finance only those receivables which are in

tune with the practices of the borrower’s firm and industry;

. The committee suggested norms for 15 industries excluding

heavy engineering and highly seasonal industries, like sugar.
The norms were applied to all industrial borrowers, including
small-scale industries, with aggregate limits from the banking
system in excess of Rs.10 lakhs;
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 . Norms are prescribed separately for 49 different industries. The
norms appropriate to each unit should be applied.

It recommended that the banker be required to finance only a

part of the working capital gap; the other part was to be financed
by the borrower from the long-term sources. Working capital gap is
defined as
current assets minus current liabilities other than the bank borrowing.
Current assets will be taken at estimated value, or as per the
tendon committee norms, whichever is lower. Current assets will
consist of inventory and receivables, referred as chargeable current
assets and other current assets.

Committee suggested the following three methods of

determining the permissible level of bank borrowings:

. : In the first method of lending, the borrower

will contribute 2 5 % of the working capital gap; the remaining
75%
can be financed from bank borrowings. This can be represented
as --- MPBF = 75% of W.C.G.
W.C.G. = C.A- C.L.

. : The borrower will contribute 25% of the

total current assets. The remaining of the working capital gap
can be bridged from the bank borrowings. This can be
represented as --
-- MPBF = 75% of current assets.

. : The borrower will contribute 1 0 0 % of core

assets and 25% of the balance of the working current assets.
The remaining of the working capital gap can be met from the
bank borrowing. This can be represented as ---- 75% (current
33 P age
 assets- core current assets) - current liabilities.
The Reserve Bank of India has implemented only the first two
methods. The recommendations apply to all borrowers having limits in
excess of Rs.20 lakhs from the banking system. At the time when this
system of lending was introduced, in some cases the net working capital
was negative while in others it was equal it was equal to 25% of working
capital gap. The committee allowed this deficiency to be financed, in
addition to the permissible bank finance by banks. It was however, to be
regularized over a period of time depending upon the funds generating
capacity and ability of the borrower. This kind of credit facility was called
working capital term loan.

Particulars Method Method

Method III

Core Assets 20 20
20

Other Current Assets 80 80

80

Total Current Assets 100 100

100

Less. Current liabilities 20 20

20

Working Capital Gap 80 80

80

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 Less: Borrower’s Contribution 20 25
40
MPBF 60 55
40

2 5 % of working capital gap

80*25% = 20

2 5 % of total current assets

100*25% = 25
100% of core current assets
20+ (80*25%) = 20+20 =40

In view of the deficiencies of the cash credit system of lending, the

committee recommended the bifurcation of total credit limit into fixed and
fluctuating parts.
The fixed component was to be treated as a demand loan for the
year representing the minimum level of borrowings, which the borrower
expected to use throughout the year. The fluctuating component was to be
taken care of by a demand cash credit, which could be partly used by way of
bills.
The committee also suggested the interest differentials. As an
incentive to switch over to the new style of credit, it recommended that
interest rate on the loan component be charged lower than the cash credit
account. The RBI stipulated the differential at 1 % .

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 The committee advocated for the greater flow of information both
for operational purposes and for the purpose of supervision and follow-up.
Borrowers with credit limits of more than Rs.1 crore were required
to supply the quarterly information. From the periodical data supplied, the
bank should ascertain whether the actual result was in conformity with the
expected result of there was a variance calling for remedial action. A “+ or -
10%” variance was considered normal. The variance beyond this limit
needed to be investigated.
The main thrust of the Tondon committee was that the banker
should be treated as a partner in the business with whom information was
to be shared freely and frankly.

Definition of NPA

An asset, including a leased asset, becomes non-performing when it

ceases to generate income for the bank. A ‘non performing asset’ (NPA) was
defined as a credit facility in respect of which the interest and/ or installment
of principal has remained ‘past due’ for a specified period of time. The
specified period was reduced in phased manner as under

Year ending march 31 Specified period

1993 Four quarters

1994 Three quarters

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1995 onwards Two quarters

The criteria for classifying an account into performing and non-

performing assets are based on the record of the recovery of
interest/installment and conduct of the running account. Further, all the
facilities granted to a borrower will have to be treated as NPA and not
particular facility or part there of which has become NPA.

Availability of security of net worth borrower/guarantor should not

be taken into account for the purpose the treating an advance as NPA or
otherwise, as income recognition is based on record of K.

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 0000

Gross advances 0000

Gross N.P.A. 0000

Gross N.P.A. as percentage of net advances 0000

Balance in interest suspense A/C 0000

DCGC/ECGS claims received & held pending adjustment 0000

Partly payment received & kept in suspense A/ C 0000

Net Advances ( 1 - 4) 0000

Net N.P.A. 0000

Net N.P.A. as percentage of net advances 0000

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 Cash & stamp
16810225 15908066 19191286
Bank balance
8719250 18879432 28464250
Investment
247783942 230412045 272457047
Loans & Advances
366432918 399710086 486720941
Overdue & Bills for
collection 3726073 5206515 8188089
Assets
17225363 19230482 24852845
Other assets
10590622 11088624 16655193
Branch adjustment -
20457 105337

Loan recovery scheme

2311126 4638237 7067042
Bills for collection
1414947 568278 1121047

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 Year N.P.A.
2014 2.86
2015 2.54
2016 2.40
2017 1.51

From this analysis, we can see that Working Capital of bank is increasing
year by year. This is good for bank because the more the working capital the
more will be the investment by the bank and the more is the opportunity to
make profits.
.

N.P.A. of last few years

By Trend Analysis
Moving Average Method

06 2.86 + 2.54 = 2.70

2

07 2.54 + 2.40 = 2.47

2

08 2.40 + 1.51 = 1.96

2

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 The above analysis shows that NPA is decreasing in year by year. This is
very good feature for bank because bank can have more faith in its customers
and also depend on the current scrutiny procedure.

Share Capital Cash In Hand 1,67,71,586

Bad & Doubtful Debts Res. Franking Stamp In Hand 24,17,080

16,64,036
Std. Assets Reserve Stamp On Hand
16,51,010 2,620
Building Fund Total Stamp In Hand
58,59,155 24,19,700
Reserve Funds
88,76,812
Tent. Bad & doubtful Res.
26,94,848
Charity Fund MSC.Bank Nsk.A/c
3,000 6,889
Dividend Equi. Fund S.B.I.
21,000 88,25,816
General Fund MSC Bank Mumbai
2,06,000 8,52,459
Inv.Dep. Res. Ndcc Bank Model Col.Br.
15,089 3,16,918
Total Res. & Other Funds 2,09,90,95 HDFC Bank Pune A/C
0 2,48,850
Central Bank Of India
5,148

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 HDFC Bank SGL A/C
6,27,234
Current Account NDCC Bank Agra Rd. Br.
4,81,95,061 9,27,234
Saving Account 13,95,02,58 HDFC Bank Nashik A/C
1 87,06,522
Reccuring Account I.D.B.I. Bank
1,14,83,392 79,37,243
Fix Account 24,72,67,01 Punjab National Bank A/C
9 10,000
Re-investment Account 22,70,49,99 Total Bank Balances 2,84,64,250
3
Locker Security Deposit
29,10,000
Matured Dep. Not paid
3,48,74,789
Overdraft Ag. Fdr Non SLR Inv. 62,47,500
21,933
Cash Credit (stock-hyp) NMC 7.5% Bonds 3,40,000
6,938
Total Deposits 71,13,11,70 Reserve Fund Inv. 5,00,000
7
MSC Bank Reserve Fund Inv. 75,00,000
Co-op Bank shares 13,62,050
Loan recovery Scheme Building Fund Inv. 5,00,000
3
Outward Bills For Collection MSC Bank Inv. 52,50,000
(contra)
O.B.C. 11,21,047 NDCC Bank Inv. 1,40,00,00
0
Overdue Int. Reserve S.B.I. Inv. 50,00,000
NPA Int. Reserve 70,67,042 MSFC 10.25% Bond Inv. 10,00,000
Interest Payable Govt. Securities 12,25,99,39
2
Interest Payable 25,51,929 IDBI Bank Inv. 6,50,00,00
5
Int. In Cash For 5,32,592 Sarswat Bank Inv.
Quarterly FD 75,00,000
Total Int. Payable 30,84,521 Shamrao Vitthal Bank Inv.
50,00,000
ICICI Preduntial Bonds
30,44,100
IOB Bonds Inv.
30,16,500
Audit Fee Payable 6.75% APSFC Bonds
4,44,084 45,97,500
T.D.S. Payable Thane Janata Bank For Inv.
21,736 70,00,000
Pay order Cosmos Bank For Inv.
6,11,89,746 50,00,000
Provisions for Expenses Yes Bank Inv.
1,20,710 70,00,000
Sundry Crs. ICICI Fix Maturity Plan
22,80,966 10,00,000
Bonus Payable Total Inv. 27,24,57,047
9,32,352
Div. Payable
8,32,866
Div. Payable 2005/06

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 9,69,144
Div. 2006-07 Gala/Shade Purchase
2,88,038
Staff Welfare Fund Staff Loan (Term Loan)
1,41,244 90,00,561
Education Fund Payable O/D Ag.FDR 9,69,55,27
30,000 2
Bank Guarantee A.E.O. Vehical Hypothication 1,43,01,76
Obligations 2,90,000 8
Closing Allowance Payable Housing Loan (New) 3,32,04,71
4
3,21,276
Total Other Payable & Prov. 6,78,62,16 Housing Loan (old) 3,79,76,56
3 9
Personal Loan 1,43,50,29
4
Profit Swapnapurti Loan
12,24,403
Profit & Loss Cash Credit (Stock-Hyp) 2,41,82,57
35,62,273 7
Balance Of Profit 3,733 Term Loan 21,69,77,29
5
Total Profit Self Help Group
35,66,006 3,39,328
Vishwadeep Yojana
38,68,750
Stock Hypo (Term Loan)
17,22,694
Cash Credit 1,53,65,75
0
B/R
14,60,230
Total Loans And Advances
48,67,20,941

NPA Int. Receivable

70,67,042

O.B.R.
11,21,047

Vehicle Account
12,67,226
Fur. Fixture & Dead Stock 1,24,05,18
2
Library
86,402
L&B 1,10,94,03
4
Total Fixed Assets
2,48,52,845

Sundry Drs. 18,87,093

Outward Clearing 11,99,450

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 Tangible Assets
1,15,721
Prepaid Exp.
3,61,773
Stock Of P&S
4,62,616
Int. Receivable On Inv.
44,01,595
Tds Receivable
2,88,904
Int. Recei On Govt. Securi.
18,45,137
Staff Advance
24,600
Premium On Inv.
57,54,648
A.E.O. Obligations Bank
Guarantee 2,90,000
Gold/ Silver Ornaments
23,653
Total Other assets 1,66,55,193

Head Office 71,165

ITZ Cash Cards 34,172

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 Equity Capital 1000000 Goodwill(At cost) 500000
6% Pref. Capital 500000 Plant & Machinery 600000
General Reserve 100000 Land & Building 700000
Profit & Loss
A/C 400000 Furniture 100000
Provision for
Taxation 176000 Inventories 600000
Bills payable 124000 Bills Receivable 30000
Bank overdraft 20000 Debtors 150000
Creditors 80000 Bank 200000
Investments(Short-
12% Debentures 500000 term) 20000

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 Particular Method 1 Method 2

W/C Gap 6,00,000 6,00,000

Less - -
Borrower Contribution 1,50,000 2,50,000
(25% of W/C Gap ) (25% of Current Assets)
MPBF 4,50,000 3,50,000

nd
So, From the MPBF method we can say that Bank will go with 2 method
because in this case borrowers contribution is more and chances of bank
getting into loss if considered about the NPA in effect.

Particular Rs
Current Assets
Inventories 6,00,000
B/R 30,000
Drs. 1,50,000
Bank 2,00,000
Inv. (Short Term) 20,000
Total Current Assets

Current Liabilities
B/P 1,24,000
Bank Overdraft 20,000
Crs. 80,000
Provision for Taxation 1,76000
Total of Current Liabilities

W/C Gap

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 Sha RCapital(Rs.

Particular Rs
Current Assets
Stock 15,00 00
12,50 00
1000000 5 00 0 0 0
15000
Land & Building
eac ,

Pro i h Loss A/C

200000 Plant & Machinery 30 0 05 00
,0
Creditors 250000 Stock 150000
Bills Payable Tot al r0e0n AsDse tsors A 150000
Curr ent Liabilities Bills Receivable 125000
B/P Cash & Bank 17 501050, 000
0
Crs. Furniture 20 002050, 000
0

Total of Current Liabilities B

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 Method 1 Method 2

W/C Gap 2,00,000 2,00,000

Less - -

Borrower Contribution 50,000 1,50,000

(25% of W/C Gap ) (25% of Current Assets)

1,50,000 50,000

nd
So, From the MPBF method we can say that Bank will go with 2 method
because in this case borrowers contribution is more and chances of bank
getting into loss if considered about the NPA in effect.

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49 P age
 The study revealed the increased importance of the Banking sector
for industry & trade and its contribution in the smooth operation of industries
and its hand in the industrial growth as banks provide the much needed large
amounts of working capital to industries.

Following important conclusions were drawn from the study:-

》 Banks are supposed to gather certain preliminary information from the

parties but it is not necessary that the information given is correct in all
respects and if loan is sanctioned to such borrowers it proves to be a
bad asset for the bank. In some cases, even if the information is
correct and bank has sanctioned loan to a sound party may not be in a
position to repay the loans. And yet another case can be of a deliberate
fraud committed by a party.
Even after so much of analyses and care taken for providing or lending fund
banks have to face large number of frauds. Large value frauds take place in
banks, specially in credit accounts.
The reasons for the frauds are the following:-

. Sometimes there is lack of pre-sanction survey including

improper identification of borrowers.
. Even in certain cases, physical verification of collateral security
offered was not done.
. Appraisal is not done properly and there undue dependence on
borrower’s financial statements including projected sales
turnover, which are at times manipulated by some hired

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 professionals.
. Disbursements are sometimes made, even before completion of
all terms & conditions of the sanction.
. Undue haste is shown in case takeover of borrowal accounts
from other banks.

》 Banks as well as the customers face problem in initial stage of scrutiny

as the customer is not aware of the information he has to submit and
even the bankers demand information in pieces. This cause
inconvenience to both and the time in the sanction of the loan also
elongates.
》 Another problem that is faced in the working capital loans is regarding
interest rate payment. The interest rate is fixed on the basis of PLR’s
STPLR’s which keep fluctuating because of the changes in the RBI’s
credit policies. If the interest rates increase at a certain point of time,
customers are relevant to pay interest at the higher rates. This
generates the risk of non-payment by customers.

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52 P age
 According to me, following steps need to betaken to overcome the
problems that the bank is faced with:-

1. As soon as customer approaches the bank for working capital finance,

the officers in the loans section need to explain to the customer all
especially terms related to the guarantee & guarantor, securities & the
interest rates. This would help in avoiding the misunderstanding later
on.

2. It was also noted that all the required information was not asked for at
all same time. Rather it was demanded in pieces. This created a bad
image of the bank in the eyes of the customer and also looses interest
in providing the authentic information. Therefore, it is suggested that
all the information be collected at once only.

3. All the information is scrutinized in one setting because otherwise the

banker would loose the links & will have to review all the information all
over again, every time to recall the earlier analysis, which would waste
a lot of time.

4. It shoud be made clear to the borrower that PLR’s are subject to

change and as PLR’s change the rate of interest to be charged may
increase or decrease and he will have to pay interest accordingly.

5. Bank should not make the disbursements until and unless the borrower
has fully completed all the formalities and all terms & conditions are
complied with.

6. There were cases where the borrower had diverted finance, granted for
working capital purposes, for other activities or had made investments

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 in associate companies or subsidiaries. Some borrowers also went to
the extent of transferring the amount of packing credit account & cash
credit account in to their saving accounts to earn interests. Therefore,
it is recommended that the bank should sanction the loan only after
fully satisfying itself that the purpose for which the loan is sanctioned
is a genuine one. It should also testify the credit worthiness of party
from the market. The penalty should be increased and such an act
should also be liable for other punishments.

7. Bank should also provide same kind of reward on the best performing
loan accounts such as rebate on interest on time, submission of
statements in time etc.

8. It should be checked that the quarterly statements reveal the true

position of the parties dealings because there were cases when the
parties had played mischief with figures to window dress their position
so that the bank does not take any measures against them for being
able to achieve the projected levels.

9. Training needs to be imparted to personal handling credit management

and they also need to be trained in customer management.

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 CHAPTER -6

Bibliography

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 Books referred.

1) Financial management: I.M. Pande.

2) Financial management: K.P. Rustogi.

Websites referred.

1) www.vishwasbank.com

2) Google

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